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The original was posted on /r/cryptocurrency by /u/genobeam on 2024-01-11 21:52:15+00:00.
There's a sentiment on this sub that the ETF can't be priced in because buy orders are essentially new buy pressure entering the market. It seems clear that there is demand for bitcoin spot ETFs and therefore the approval should increase demand for bitcoin. It's also clear that to fill these ETFs would require buying bitcoin with new money entering the market.
However, it's also possible for this increase of demand to be priced in. The price of bitcoin is largely based on speculation. The majority of bitcoin investors are buying with the intention of eventually selling for a profit in fiat. Price determination is not as simple as "new price = old price + cash inflows". Speculators can account for incoming expected cash inflows and apply buy pressure in anticipation of those inflows with the expectation of using those inflows for exit liquidity.
Example 1:
It's January 2023 and the price is $20k USD/BTC. The market cap is $380 B USD. ETFs and the halving are on the horizon. A portion of investors expect Bitcoin to increase in price by 200% because of the ETF and halving. As such these investors are willing to apply buy pressure until the price hits $60k.
The Market cap at $60k is ~$1.1 T USD. But since price finding happens on exchanges where the supply is limited, the price can reach $60k without an inflow of $760 B (the difference between the old and new market cap). In fact net inflows from ETFs will almost certainly be much much smaller than that amount.
Now say it's March 2023 and the price is $60k as predicted.
Since the market cap increased by $760B without $760 B worth of inflows there is a bit of a bubble in this scenario. The "value" of all bitcoin is $1.1 T, but only if buy pressure continues to equal sell pressure. if investors speculated that the price is going to $60k, they're going to stop buying when it hits that price point, and they're going to sell when it gets above that price point. If their speculation is correct they'll be able to ride the wave of incoming buy pressure without crashing their accumulated bags.
If ETF demand is more than the speculated amount then the price should keep going up, but if the added demand from ETFs is equal to the speculated price change the price should not change that much. If the demand from ETFs is less than speculation, the price could go down.
Example 2:
At a price point of $200k the market cap for bitcoin would be almost $4 T. For perspective, there are about 60M americans who contribute to 401k's every year, the average salary in the US is $60,000 and the average amount contributed is about 11.3% of income with employer contributions included. That means the total amount contributed to 401k's every year is about $407 B. If every american who contributed to 401k's put 100% of that contribution into bitcoin it would take 10 years to get to $4 T. So, it's fairly clear that speculation plays a larger role in price determination than pure inflows and outflows.
TL;DR: There is clearly demand for spot bitcoin ETFs. This increased buy pressure has not yet been realized because the ETFs mostly need to fill orders on exchanges or through 3rd parties that are not affiliated with the sponsor/trustee. That does not mean that the effect of this buy pressure is not already priced in. Speculators are almost certainly trading bitcoin with the expectation of this additional buy pressure incoming. It's too simplistic to say "the bitcoins haven't been bought yet, therefore they are not priced in".
edit: just to answer the obvious question: "why would these speculators use the additional buy pressure from ETFs for exit liquidity instead of letting the price keep going up?"
because it's a competitive marketplace and just as the market cap can increase more than net inflows, it can also decrease more then net outflows. exiting at the right time is important because if the etf is priced in and other prospectors use the wave for exit liquidity you could get caught holding a bag you can't sell